Sales Boredom at Nordstrom

High-end retailer Nordstrom(NYSE: JWN) gained ground this morning after turning in fiscal Q2 EPS of $0.51, up 8.5% from a year ago and a penny ahead of the First Call mean estimate. However, net income climbed by only 2.4% to $70.8 million, meaning a large chunk of the earnings gain was attributable to a 6% reduction in the diluted sharecount over the past year. But on a less critical level, the company did manage to boost its gross margin to 34.6% from 32.9% a year ago, and for that it was rewarded by the Street.

Nordstrom is still struggling with the dual issues of managing its inventory levels and finding the right merchandising mix to get its well-heeled clientele running up their platinum charge cards at its stores again. While the company's recent ability to knock down operating expenses and repurchase large amounts of its own shares is commendable, its merchandising efforts still leave something to be desired. All of the firm's major sales trends are either stagnant or headed in the wrong direction, as they were in the previous quarter.

Net sales of $1.44 billion were down 0.3% from last year and up only 7% from two years ago. Last quarter's 2.6% decline in same-store sales was followed by a 2.4% slide this period, after a disastrous 13.8% drop in July comps wiped out any positive benefits from an 8.9% same-store sales advance in June. The quarter should have been an easy comparison for Nordstrom given that its Q2 comps were down 0.2% last year as well. Equally disturbing, the retailer's sales per square foot on an annualized basis continued to trend down in Q2, falling 5% from a year ago after a 6% year-over-year decline in Q1.

However, management is looking on the bright side of things and expects the company's overall performance to pick up in the coming quarters. "We are committed to growing comparable store sales, and are optimistic about our sales outlook for the balance of this year," Chairman and CEO John Whitacre said. Three new full-line stores will be rolled out in the current quarter, with an additional Nordstrom Rack discount outlet store also in the hopper, so the sales slump has done little to deter the company's expansion plans.

But unfortunately for Whitacre and crew, the retailer can't rely on share repurchases to boost its quarterly earnings forever. While buybacks typically carry positive connotations in the eyes of investors, Nordstrom might want to consider deploying its cash flow toward activities that might yield higher future sales rather than a lower near-term sharecount. All else being equal, investing in efforts that can secure long-term earnings growth through consistent sales growth will ultimately provide a higher a return on investment for shareholders than investing in the stock of a retailer whose sales growth is permanently stuck in neutral.